KENYA will offer five state-owned sugar companies for sale to private investors over
the next year after writing off $611 million of debt, the country’s Privatisation
Commission has said.

The government plans to sell its stakes in Nzoia Sugar
Co., South Nyanza Sugar Co., Chemelil Sugar Co., Muhoroni Sugar Co. and Miwani
Sugar Co.
to make the industry “more viable,” the commission said in a May 15
statement.

The companies accounted for about 10% of the 592,100 metric tonnes
of sugar produced in Kenya last
year, according to Kestrel Capital (East Africa) Ltd., a Nairobi-based
brokerage.

“Government reached the decision of bailing them out
completely so that the firms would look attractive to investors,” Henry
Obwocha, the chairman of the commission, said in an interview on May 18 in the
capital, Nairobi.

Kenya
is trying to overhaul its sugar industry, which the Food and Agriculture
Organisation says is beset by problems including dilapidated factories, poor
governance, insufficient funding and inadequate research.

It means that domestic production costs can be as high
as $900 per ton of refined sugar, partly because the majority of farmers are
smallholders so the industry does not benefit from economies of scale.

By contrast, costs can be as little as $300 per ton in
countries in the 19-nation Common Market for Eastern and Southern Africa (COMESA) bloc,
according to Kenya’s state-run Sugar Directorate.

But the problems are not unique to Kenya – Africa’s
sugar industry is going through tough times as a global sugar glut has set
prices careening downward to levels not seen since 2010, much like what has
happened to crude oil in the global markets.

For the fifth year running, the world’s sugar
production is projected to exceed consumption this year, with an expected
surplus of 620,000 tonnes.

With prices tumbling, producers would rather hold onto
unsold stock than sell it at a loss, and this year’s surplus will set global stockpiles at nearly 80 million tonnes by the year ending Sept. 30 – enough to supply the
world’s top five consumers for a year.

Sugar has always been a “political” commodity. Though
not nutritionally necessary, it has many of the characteristics of an addictive
drug, and historically control of the sugar trade has been an important driver
of the fortunes of men, and empires.

The Atlantic slave trade which shipped an estimated 10 million Africans out of the continent grew on the back of Europe’s
demand for sugar, which was grown on labour intensive plantations in the
Caribbean.

In 1763, after defeat in the Seven Years War, France
was given the option of ceding its colony in modern-day Canada (8 million sq.km
at the time) or the sugar-producing island of Martinique (1,182 sq.km) to
Britain. It chose to relinquish Canada and keep Martinique.

In Kenya’s case, the government has pumped money into
loss-making factories partly for political reasons in order to secure votes
from the densely-populated sugar-growing areas, but this is no longer tenable.

Of the total $611 million owed by the five factories the
state was owed $360 million, suppliers and farmers $61 million, and other
creditors $134 million.

Africa accounts for just 6.2% of the global production
of refined sugar, which is dominated by Brazil, India and China, where unit
production costs are much cheaper than Africa.

The industry in Africa should be booming – the region
has four of the five countries with the highest yields of sugar cane per
hectare. The global average is 78 tonnes per hectare, but
African producers such as Egypt were clocking 126 tonnes, the second highest in
the world after Peru.

Ethiopia, Senegal and Malawi - in third, fourth, and fifth place - are also bringing in
yields of more than 118 tonnes per hectare.

In addition, a growing middle class with a disposable
income to buy treats like soft drinks, cakes and ice cream is driving up demand for
sugar, which – in theory – should translate into better fortunes for African sugar
farmers.

But the reality on the ground is an inefficient sugar market in Africa skewed by protectionist tax regimes in countries like Kenya
and Rwanda, which try to shield their domestic producers from competition from
imports, but that end up rendering these markets inaccessible to neighbouring countries.

Even worse is the deep and extensive corruption in
Kenya’s sugar story, that of cheap imports from the port of Kismayo in
Somalia and smuggled into Kenya – that is linked to the financing of terror in
the region.

One investigation showed that in 2013, more than 15,000 bags of sugar worth $740,000 was smuggled
into Kenya every day through the porous border with Somalia, thus averting the
onerous import duties if they were to be imported through the official channels.

The sugar barons pocket millions, as do
government officials who receive huge kickbacks to let in the goods. Rogue elements in the Kenya
Defence Forces (KDF) stationed in Kismayo as part of the African Union Mission
in Somalia (Amisom) has also been implicated in the sugar racket.

Although al-Shabaab lost control of the
port in 2012, it still controls the roads in the hinterland, charging about $270 for every truck ferrying sugar inland – thus by allowing the sugar
imports, KDF indirectly bankrolls the very terror group it is stationed to
fight.

Across the border into Kenya, a
consignment of Kismayo-origin sugar is still nearly 60% cheaper than in the
mainstream Kenyan market, meaning the sugar barons are making huge profit
margins, while local sugar companies complain that the smuggled sugar is being
illegally packaged and sold in their branded bags.

Meanwhile, major sugar producers in the region such as
Madhavani Group in Uganda and EcoEnergy Africa in
Tanzania have shelved big sugar projects because of unfavorable market
conditions, company officials said.

Johannesburg-based Illovo Ltd, Africa’s
biggest sugar producer, endured difficult market conditions because of cheap
imported sugar in the market, said company chairman in a statement in July, as
did Tongaat Hullett Ltd. whose sales in Zimbabwe contracted 25% amid a flood of
cheap imports.